Customer Loyalty Programs

The comment (above) from a furniture store owner illustrates the typical expectation that customers return to stores to buy furniture, perhaps after five years or more. It’s a long time to wait, but there are a number of ways retailers can shorten the interval between customer visits. Some of these are:

• Follow up systems that allow salespeople to track customer sales and follow up with new products or special offers likely to be of interest.
  
  
• Preferred customer events.
  
  
• Mailing, e-mailing or connecting with customers over social media with content that keeps customers engaged.
  
  
• Loyalty or VIP programs that focus on bringing customers back to the store after the sale. 

It’s a fact that furniture stores lag behind retailers in other industries in their efforts to create incentives for customers to return to stores more often. Many in our industry seem content to throw large amounts of advertising dollars against the wall and see what sticks. Advertising is an effective way to bring in traffic, but there is a downside. It can be a high cost strategy if efforts to bring back existing customers are not fully explored as well.

The remainder of this article will focus on loyalty programs along with the positives and negatives of the various types. Retailers today, regardless of size are constrained by time spent on buying, selling, staffing, customer service, delivery, accounting, advertising, etc. Who wants to put one more item, a customer loyalty program on the list? A more important question, however, for retailers is what happens if you don’t put it on the list? The answer is that you will be passing up a strategy to get existing customers back into stores at low cost.

Types of Loyalty Programs

In theory, there are two kinds of loyalty programs retailers can offer. The first is a traditional rewards model where the customer accumulates points at the time of purchase to be used for future purchases. This model is similar to rewards programs found in almost every industry. The second model is the VIP membership in which the customer pays for a membership to enjoy the benefits of being a VIP. The most obvious example of this program is Costco. Currently, Restoration Hardware is the most recognizable furniture retailer that provides a VIP program in the furniture industry. Restoration Hardware charges customers an annual fee and provide a significant discount to members. Which model works?

Both can work, but the model that works best depends on the store. Here are examples of each program type.



Traditional Rewards Model: Recently a nationally recognized retailer started a program offering levels of in-store credit along with each purchase. Simply put, the more customers spend, the more they get back in credit. The program, in its infancy, has shown some immediate results. Here is one example. A customer made a purchase and received a $275 in-store credit. She went back to the store about a month later and spent her $275 credit plus purchased additional items for $3000. Would she have returned without the loyalty program? It’s hard to say, but it’s likely that the $275 credit kept her from considering going to another store. Plus, it created an incentive to come back sooner to make another purchase. We are seeing 5% of loyalty program members who purchased furniture return within 60 days. Imagine having a customer return in 2 months rather than 5 years.

Membership Loyalty Program: The second model is based on having a membership. Late last year, a small independent store operating in a town with a population of roughly 22,000 people started a VIP membership program. They charged a $49.99 fee for a two-year membership which gave their customers the opportunity to shop at reduced VIP pricing along with additional savings and coupons over the remainder of the term. In seven months, they acquired more than 700 VIP members, generating revenue of over $35,000.

The approaches the stores took in the examples given above have two things in common.

1. Each store recognized the need to create a program to generate excitement and commitment from customers. 
   
   
2. Each of these stores was the first in their market to offer the program. Being the first to market gave them an advantage over their competition, as customers are unlikely to join two loyalty programs. By being first, they have given their customers an incentive to continue to return. 

Considerations

Return Times: If you don’t give customers a reason to return sooner, you should expect/hope that they return in about five years. However, if they have purchased a VIP membership card, they will be committed for the duration of the program which is typically two years. Conversely, if you offer a loyalty program, you should expect to see a percentage of customers return within weeks or months instead of years to make a secondary purchase.



Dollars Spent: You should also expect to see returning customers spend two to 11 times their credit amount when they return. For example, if a customer is given $100 in-store credit when they spend $2500, they are likely to return to spend $200-$1100 on their return to the store.

Protecting Margins: It is important to note that certain parameters must be put in place to ensure this return rate, and protect margins. Retailers should focus on two key facts which will protect their margins when establishing a program.

• Offer in-store credit/discounts and not cash-back or external benefits. You want the customer to come back to the store, not go on a trip with their rewards! 
  
  
• Build the program with limitations to the credit provided. This will allow you to protect your margins while providing the customer with the opportunity to get great deals.

Management Time: When set up properly, a VIP or loyalty program will take almost no time, but will provide results which can be quantified. A good program will be able to track results, provide timely follow up to your customers, provide on-going communication with your customers, drive traffic to the store, and more importantly, deliver sales results.

5 Program Set-Up Steps

Once a retailer has decided to focus on customer loyalty, a program can be designed in five steps:

#1. Loyalty vs. the VIP model: To charge or not to charge, that is the question. Most retailers want to charge their customers for a VIP membership as it obviously creates positive cash flow, can be used to close sales and will provide incentives for the customer to return. However, the traditional loyalty program which is provided to the customer for free will also meet these same goals without giving a discount on the initial sale. Retailers must take into consideration their history and previous marketing efforts. A new retail store shouldn’t attempt to charge for a membership as their reputation and customer base isn’t fully established yet. Also, stores that market solely on price and frequently discount will also find it challenging to charge for a VIP program. You need to ask yourself, “Would I want to pay for a membership to my store?”.

#2. Rewarding the customer: Once you have chosen the model that best fits your needs, you need to create incentives for customers. The VIP customer should get a discount on their initial purchase along with additional discounts on future purchases and in most cases, for a specific time period. This may include discounting on extended warranties, which in turn will increase closing rate on warranty sales. For example, a store currently charging $49.99 for a two-year membership had a 25% closing rate for extended warranties. By giving VIP members a 25% discount on warranties, they have almost tripled the closing rate. It does reduce the margin, but it significantly increases sales volume, which along with the membership fee equates to higher initial sales. In contrast, the Loyalty model which is free to the customer can often increase closing rates and create a much quicker return for additional purchases. Telling customers that they get a $100 in-store credit that can be applied to their next purchase simply by signing up to the program is an excellent generator of good will. The loyalty model can be set up to avoid backend costs. You can negate cost on additional sales by building in specific parameters to the program which will be much more cost effective vs. the VIP program. Both models can include variations including tiered rewards, specific “members only” offers and additional incentives.

#3. Keep customers engaged: Every loyalty program should include a welcome/thank you e-mail for their purchase. This communication introduces the program and follows up on any service issues. It can also provide an opportunity to advertise or send a coupon to your new customer. From there, you need to decide how often you will contact customers, perhaps quarterly to maintain customer contact, build brand recognition and at the same time, build your data base. The value of building a customer data base can not be overlooked.

#4. Operational set-up: At this point you have a basic outline of your program and can now address its operational requirements. For example; you will need to design and print your membership cards, POS material, e-mail template, customer log-in access portal, retailer access portal, a tracking system for purchases and points, redemption allowances etc. Essentially, everything to make it work. Some POS systems will allow you to e-mail customers and build a data base, however, the functionality falls short for a proper loyalty program. There are several moving parts to a program and unfortunately, it is not a DIY project. Engaging a third party to run your program will not only be cost effective but will also reduce the time required to almost none.

#5. Get started: Regardless of the model you choose, you need to have the system in place and your staff trained and on board with the program before starting!.You also need to have managers engaged so they can continue to drive the enthusiasm required for ongoing success. Finally, don’t wait too long. If your customer joins another loyalty program offered by a competitor, you run the risk of losing that customer.



Implementing a program can seem like a daunting project at first but in reality, with a bit of effort, it can be up and running within 30 days.

Change your expectation of five years for your customer to return to months or even weeks and not only your customer will thank you but your sales staff will too!

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About Chad Burwell: Chad Burwell, owner of Rewardslp.com, a company which specializes in the development of customized Loyalty and VIP programs for furniture, mattress and appliance retailers. For contact details, go to www.rewardslp.com.